Argument against Permanent Life Insurance: High Commissions Paid to Agent

It seems one of the biggest reasons you should not buy whole life or universal life insurance is because the agent or broker who sold it to you will get paid to do so. At least this is a claim made in almost all of the articles ever written in an attempt to steer you away from these insurance products.

In what has to be the most ad hominem of all the arguments against permanent life insurance, the amount of money I make (or don’t make) takes center stage—I wonder how many of those folks wrote their article for free like I am this one right now.

The Commissions are too Damn High!

The biggest contention people seem to have with the commissions paid to insurance agents is the fact that agents get paid somewhere between 55 and 100% of the premium you pay as a commission. Or at least this is the claim. The truth is commissions paid on insurance contracts vary widely and are heavily influenced by the intended purpose of the insurance purchase.

Yes it’s true that for someone looking to buy life insurance to establish a death benefit, the commissions paid might very well total something in the range mentioned above. But let’s not forget the time and expense that goes into what the insurance agent is actually doing.

Granted there are some circumstances where an agent might get lucky and do practically nothing for a sizable payday, but those situations are few and far between. And yes it’s even possible that agents could work for less money—but we could make that argument for anyone and anything. It’s not unique.

In cases where someone is purchasing permanent life insurance more for it’s cash accumulation features rather than death benefit, only fools buy policies that would pay an agent the level of commissions mentioned above. I’m not trying to suggest this doesn’t happen. It happens all the time.

But agents with questionable knowledge or business practices don’t speak for the industry. We had a lengthy discussion on the commissions topic over two years ago and it’s easy to see the commission rate is far less than some have suggested in these cases.

Who you Gonna Call? Your Insurance Agent!

That commission mentioned above is known as a first year commission and it gets its name from the fact that it’s only paid in the first year you pay premiums. While it’s true the agent will receive a much smaller payment in subsequent years, the total payment to an agent given the premiums you pay over a period of time (let’s use 10 for example) is more like 5%. Despite this, your agent is your go to contact after the sale whenever there’s a servicing need.

Just this past week I had the following service related items to handle for clients:

Beneficiary change

Risk class reconsideration

In force ledger requests (four of them)

Collateral assignment

Address change

This doesn't include the three lengthy emails I read and lengthy replies I wrote to current clients who reached out to ask a few “what if/just curious” questions about various subjects. Categorically declaring the commissions paid on a life insurance policy too high is an emotional juxtaposition argument that preys on the weak-minded.

Okay…then the Fees are too Damn High!

We’ll touch again on this one next when we talk about those awful investment returns (sarcasm light is on), but for now I will make like others and focus on just one thing in a vacuum to prove that something is bad (sarcasm light still on).

We’ve actually addressed this subject already. And we’ll be addressing it again later on this year. Turns out that the fees amount to little more than 0.5% of the cash in the policy.

But let’s lets not forget that it’s possible to buy permanent life insurance, pay premiums for a death benefit for several years, and then cancel the contract receiving a refund in excess of the premiums you paid.

So in other words, you had a death benefit in place making sure that you slept peacefully at night. And then when you decided you didn’t want the protection anymore you got all of your money back and then some. What a fee ridden monster.

Who really cares how much the Agent is making?

Since when did we decide the profit motive was a bad thing? Permanent life insurance brings a lot of great benefits to the table and what you can get out of something matters way more than how much money I might make selling it to you.

I understand there is a need to temper this line of thinking to some degree. But the only direction this argument can take is a path to eventual circular logic about commissions that is extremely disingenuous. It does…admittedly…make for interesting gossip.

Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.